Bank of Montreal (TSX:BMO)(NYSE:BMO) is one favourite bank stocks despite the fact that it is one of the lesser-known companies in the sector. It isn’t inundated with energy loans, it is making smart acquisitions, and there are very few companies that have a longer history of paying dividends than Bank of Montreal.
In its most recent quarterly results, Bank of Montreal showed just how efficient its business is. It reported a 13.2% increase in adjusted net income to $1.18 billion, which resulted in a 14.4% increase in adjusted earnings per share to $1.75, which beat expectations by $0.03.
Part of the reason for this is because its net loans increased by 12.5% to $345 billion and its total deposits increased by 9.6% to $470.84 billion. The reality is, it’s increasing the amount of available capital it has and then making smart loans. That’s why earnings are up.
But there’s another reason its earnings are up. Its exposure to energy loans are ridiculously low, so the defaults on those loans are lower. At the end of Q1, it only had $7.4 billion in oil and gas loans, which is a tiny amount of its portfolio. When times were good, some questioned if this was a smart move by the company, but now it’s gaining because of that move.
Another reason I really like Bank of Montreal is because it is expanding in the United States. One of its most recent acquisitions was the Transportation Division at General Electric. As we know, GE needs to move away from its financial business, so it doesn’t get plagued by regulation. This has created some decent buying opportunities for financial firms such as Bank of Montreal.
What I like about this deal is that it adds $13 billion in commercial loans to the bank’s loan book. But more than that, the Transportation Division accounts for 20% of all lending done for the trucking business in the United States. Despite other economies around the world, the U.S. continues to remain strong, which means that the trucking business will stay strong. Bank of Montreal will be able to benefit from that strength.
Ultimately, this leads to the ability of the bank to pay a very lucrative dividend and, more importantly, continue to pay it despite any turbulence the economy may experience. Presently, Bank of Montreal pays a 4.17% yield, which comes out to $0.84 per quarter. A dividend of $3.36 a year is significant and, if reinvested in the stock, should help you create a solid dividend portfolio.
Morover, Bank of Montreal has paid a dividend since 1829. Consider that the British controlled Canada in 1829, there were two World Wars, a Great Depression, and numerous recessions, which ultimately led to the Financial Crisis of 2008. Yet, during all of this significant change, Bank of Montreal was able to pay a dividend.
We’re investors here, and we want to invest in companies that are going to grow and that are going to be able to return money to us. Bank of Montreal, in my opinion, is making smart moves in growth, reducing its risk, and paying lucrative and stable dividends. Want a strong income portfolio? This is one of the first steps to achieving that.
